Biases and uncertainty

Rational decision theory is often used as the norm for comparing human, organisational or economic decision-making, but rational decision theory takes only account of probability and not Knightian uncertainty. We should consider the extent to which so-called ‘biases’ could be attributed to uncertainty rather than error.

Hyperbolic discounting

Exponential discounting would be rational. But this assumes that the current epoch lasts forever. If we are uncertain of this, then the discount rate should be diminished, as in hyperbolic discounting (Sozou, P. D. (1998). “On hyperbolic discounting and uncertain hazard rates”. Proceedings of the Royal Society B Biological Sciences 265: 2015 ).

Normalcy bias

This is where people ignore evidence that the context has changed. , a form of status quo bias. Here the rational norm is being applied with the hind-sight that the situation has changed, yet the rational norm seems to encourage normalcy bias.

Conjunction fallacy

The conjunction fallacy is where the conjunction ‘A and B’ is considered more probable than A alone. It typically occurs where A is vague whereas ‘A and B’ is relatively precise and seems to explain the evidence. If one is uncertain about the context (as in many psychology questions) then it is more appropriate to try to estimate the likelihood P(E|H) rather than the probability P(H|E), which depends on the priors and hence context.

What appears to be a fallacy may be evidence that people tend to think in terms of likelihoods rather than probabilities. (Even psychology papers can confuse them, so this may be credible.)

Reference Class forecasting

Reference class forecasting is a method for reducing reliance on probability estimates. It ensures that forecasts are made by comparison with real data, and seeks to capture relevant parameters. However, it may still be necessary to take account of potential novel contexts, to avoid shocks.

See Also

Knightian uncertainty Induction The financial crash

Dave Marsay

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About Dave Marsay
Mathematician with an interest in 'good' reasoning.

One Response to Biases and uncertainty

  1. Pingback: Examples of Uncertainty in Real Decisions | djmarsay

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